Are Solar Stocks Too Good to Be True?

What if I told you there was an industry you could invest in that was growing more than 50% per year? What if leading companies in that industry had gross margins of 20%, 30%, even 40%? And what if I told you those stocks traded with single-digit P/E ratios? Wouldn't that sound too good to be true?

That's exactly where we are in the solar industry right now. Companies are trading at multiples usually reserved for industries with no prospect for growth or companies slowly going out of business. But solar is neither of those things, and it appears that the industry's stocks are extremely undervalued on the surface.

There are a lot of factors to consider, and below I've outlined two that leave me very bullish and two that make me think about running for the hills from solar stocks.

Positive: Value too good to pass up
Usually a P/E ratio under 10 and a PEG ratio (price to earnings growth) under one means a stock would be well into the value stock category. But many of solar power's biggest manufacturers trade with very low forward P/E ratios, PEG ratios below one, and have very high growth rates to go along with that value.

Company

1-Year Revenue Growth

Forward P/E Ratio

PEG Ratio

LDK Solar (NYSE: LDK  ) 128.5% 3.66 0.15
JA Solar (Nasdaq: JASO  ) 222.4% 4.43 0.35
Hanwha SolarOne (Nasdaq: HSOL  ) 106.4% 5.60 0.38
Suntech Power (NYSE: STP  ) 71.4% 8.88 1.06
Yingli Green Energy 78.5% 6.47 0.36

Source: Yahoo! Finance and Fool.com.

All of these companies are growing rapidly along with the solar market and look like incredible values. Even if profit falls as pressure hits panel prices, it looks like there's more than enough cushion to handle it. But there's a common risk as well.

Negative: China should scare you at least a little bit
The companies I've highlighted above are all Chinese stocks that have to be suffering some decreased value because of the turmoil hitting some of their counterparts. If you don't know what I'm talking about, do a Google search for China MediaExpress, Puda Coal, or any of the other Chinese stocks that have come into question.

I'm not suggesting in any way that any of these companies are frauds, lying about financial records or reporting sales and contracts that don't exist. I am saying that I've seen many companies people thought were of quality turn into a complete dud. Forbes China even made China MediaExpress its top "Up-and-Comers" stock of 2011. Now the stock is on the Pink Sheets, and investors are licking their wounds.

This is the kind of thing that keeps a Fool like me up at night. I don't want to recommend a stock or buy a stock that is going to end up like China MediaExpress. Beware of China!

Positive: Solar is the future
You can debate among yourselves whether solar power is really the future of energy, but this Fool is drinking the Kool-Aid and driving the solar bandwagon. I think we'll look back in 50 years and laugh about the days when we got most of our energy from dirty coal and oil.

I'm seeing costs fall for solar power and rise for other energy sources and wondering how this could not be the future? Yes, there are challenges like energy storage and the intermittent nature of solar and even wind power, but I think these are challenges we can overcome with a little engineering muscle.

To me, this is like getting in on the tech boom in the early '80s. If you pick the right stock and hang on for the ride, we should be headed much higher.

Negative: Margins are going nowhere but down
It's not a secret that the first half of the year has seen panel prices fall, margins get squeezed, and solar stocks fall as a result. Some investors see these falling prices and can't see the end to the pain. If they're right, profits will continue to fall and these stocks that look cheap will look expensive very quickly.

Second-quarter results and management comments should give us some insight into how this negative for the solar industry is playing out.

What to do now?
If you're a believer in solar, I think there are two ways to invest in it. You can choose the large, safer, U.S.-based companies First Solar (Nasdaq: FSLR  ) and SunPower, which don't have the same upside but probably won't leave you broke. Or you can pick a basket of your favorite higher-risk solar stocks to spread your risk. I've added LDK Solar to start this strategy, and I'm considering adding Trina Solar and/or Yingli Green Energy to round out the group.

What investors need to avoid is companies that are falling behind because of inferior products such as Energy Conversion Devices (Nasdaq: ENER  ) and Evergreen Solar (Nasdaq: ESLR  ) . These stocks have been a sinkhole for investors' money for a long time, and that's likely to continue.

What solar stocks are you buying? Leave your thoughts in our comments section below.

Fool contributor Travis Hoium owns shares of First Solar, SunPower, LDK Solar, and is short puts on LDK Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2011, at 3:09 PM, ibuildthings wrote:

    SOL sells wafers into the manufacturers higher on the food chain. They have been getting hammered over the margins issue lately. But they seem to be a picks and shovels play on solar. Thoughts?

  • Report this Comment On July 08, 2011, at 3:38 PM, millsbob wrote:

    Travis, thank you for the continuing in-depth coverage.

    just wondering, does TMF know something i don't about GT Solar (SOLR)? they're really at the base of the solar food chain, and have financials at least as impressive as those above. it's also on Joel Greenblatt's Magic Formula list, and i've made a Serious bunch of money on it in the past year or so and only see prospects improving for it.

    i fail to see how this isn't the very best play on solar, and now they've just gotten a $500m order in their new foray into the same base position in led's.

    what don't i know that's going to bite me later?

  • Report this Comment On July 08, 2011, at 4:50 PM, jad9000 wrote:

    It has been amazing watching the same companies that took these companies public turn on them and drive them into the ground - as they have increased sales and earnings by 300%, 400%, 500% over the past few years. Now, just as the assaults are peaking the reality is starting to leak out. After a hiicup in Q1 and part of Q2, mainly due to false reporting regarding Germany, Italian dallying and more false reporting and a three month excess inventory period, they are off to the races again. Cell prices rose last week and poly prices, by all accounts, will rise this week. Modules and wafers aren't far behind. Sales are rocketing, beginning in late Q2 and continuing through the end of this year and into next. I will predict that margins will begin to rise again in mid-Q3 and through Q4, with shortages appearing in many products on and off through 2012. We are just starting to replace trillions in sunk cost for nuclear and coal with solar and other green energy source. This party is just starting.

  • Report this Comment On July 08, 2011, at 5:44 PM, earthunit wrote:

    ENER has "inferior products?"

    You sure you did your homework on that?

    I think not.

    What makes ENER's UniSolar products inferior?

    You're way off base with that statement!

  • Report this Comment On July 08, 2011, at 6:23 PM, jad9000 wrote:

    To make the point from my prior post, from ICIS today - we are going into full throttle for solar over the next few years.

    SINGAPORE (ICIS)--Asia polysilicon prices strongly rebounded from lows and are expected to continue rising in the weeks ahead, supported by higher demand from Europe and gains in downstream photovoltaic values, industry players said on Friday. Spot polysilicon prices rose by $2-3/kg (€1.4-2.1/kg) in the week ended 7 July to $53-57/kg FOB (free on board) NE (northeast) Asia, according to ICIS data.

    Deals were heard at $54/kg FOB NE Asia for loading in July for the higher 9N grade on a spot basis, while fresh offers ranged from $55 to $60/kg FOB NE Asia. Buying indications were at $51-53/kg FOB NE Asia, market players said. Prices rallied following Germany’s move to go nuclear-free and the decision not to scrap subsidy for solar players from July, after taking a nosedive in June because of bloated solar module stockpiles in Italy, industry players said.

    Spot prices of polysilicon – the raw material used in making solar wafers, cells and modules – bottomed out at $50-52/kg FOB NE Asia in the week ended 15 June, according to ICIS data. When ICIS started tracking polysilicon values in the week ending 16 March, prices stood at $75-85/kg FOB NE Asia. “Polysilicon prices will strengthen in the second half of this year. Spot supplies are also limited in July,” said a market player in northeast Asia.

    Photovoltaic prices are stable-to-high this week, with solar multi-wafer (156mm2) values steady at $2.00 2.10/piece and mono wafer (156mm2) unchanged at $2.40-2.60/piece, market sources said.

    Solar cells’ price range widened slightly to 75-90 cents/watt, while solar silicon module per watt prices have risen by 10 cents at $1.20-1.50/watt this week, they said.

  • Report this Comment On July 08, 2011, at 6:26 PM, bobthebear wrote:

    Travis, perhaps you're being paid by the same group as ECDfan. Why else would you keep talking about a $1 stock. Don't you think it's strange to be talking about ENER and ESLR? I never see you say, "Don't cover your shorts". I've been a trader for 50 years and when I see your comments it occurs to me that your agenda is not investment, but something else.

    God luck, young man.

  • Report this Comment On July 09, 2011, at 1:37 AM, earthunit wrote:

    I agree, Travis speaks with forked tounge. NOT a straight shooter! Investors beware of his writings!!!

  • Report this Comment On July 09, 2011, at 6:55 AM, gh0stith3machin3 wrote:

    I'm pretty huge on SUPPLIERS to sustainable energy (MIND and SOLR). SOLR provides equipment to sustainable (e.g. Solar) energy creators, and that is where I view the big gain (MIND supplies equipment to oil and natural gas creators).

    To me, the big gain is in suppliers to the creators (broader market). MIND + SOLR, in the short time I have owned them, are (averaged) up 20% and gaining.

    That's my play on sustainable energy!

  • Report this Comment On July 09, 2011, at 7:01 AM, mbs9 wrote:

    how about the solar stock JKS? does anyone have any info on them ?

  • Report this Comment On July 09, 2011, at 4:05 PM, OutperformOrDie wrote:

    Travis,

    I appreciate your continued coverage of solar and I think it's safe to say there are few individuals who have your level of knowledge and understanding of solar stocks. It's a tough industry to cover because it's moving at high speeds but I'd say you're doing a bang up job.

    Keep up the good work, buddy.

  • Report this Comment On July 09, 2011, at 9:38 PM, buzzltyr wrote:

    Good article, really do not see what the issue is, free electricty. How can that be bad. I think the basket is the correct approach for chinese solars.

    I own LDK- The most aggressive and forward lookimg

    Yingli- They seem to have the best US sales connections

    SOL- Good balance sheet

    CSUN- Bought on a nice dip.

    I agree, in 20 years we will look back and laugh at the skeptics. I can remember in about 86 when they were saying the same thing about hard disk manufacturers, like how could the ever sell more. We can say they same thing about Ipods.

    We are not even in the first inning on solar expansion world wide, we are not even on the bus to the game. I look around, maybe one out of 1000 has solar, maybe not even that much. We will see 25% in 20 years, that is a lot of panels

  • Report this Comment On July 10, 2011, at 12:06 AM, Shanteram wrote:

    LDK is not a low cost producer. The lowest is an 8B HK company, GCL Poly, which is best bought in HK, but can be bought here as GCPEF.PK. See the excellent article:

    seeking alpha.com/article/272273-2

  • Report this Comment On July 10, 2011, at 10:16 AM, dsong wrote:

    good article.

    Most analysts are either crooked ones to bash solars or they are totally ignorant to solars.

    China is leading solars in the world. Bash china solars is to fight China

  • Report this Comment On July 10, 2011, at 2:06 PM, Notwage wrote:

    Solar greatly benefits from the accelerating pace of technological change. Faster, cheaper, smaller, better.

    Regarding GT Solar (SOL), can anybody guess as to why insider ownership dropped 99% in the past 6 months?

  • Report this Comment On July 10, 2011, at 3:31 PM, greggntexas wrote:

    I think if you were to read some of the news from earlier this year of HyperSolar, you'd have it ready to move anytime as well. Cheap penny stock, but with a few things in place, it could skyrocket. Well worth the small risk at it's price!

  • Report this Comment On July 11, 2011, at 8:29 AM, ChrisR77 wrote:

    I have Uni-Solar PVL124's on my roof and I have been more than impressed. They lay flat, no mounting expenses, and excellent production for amorphous cells. I just don't think they've done a good job of marketing their products.

  • Report this Comment On July 12, 2011, at 12:30 PM, curt00 wrote:

    The reason that these Chinese solar stocks have been beaten down, has nothing to do with the scare of the Reverse Mergers.

    If so, then BIDU, SINA and MPEL would be beaten down as well. But they're not. They're soaring.

    The only logical reason I can think of for these low solar stock prices, is: manipulation. Read more:

    "Wall Street's Half-Reports on Solar"

    http://seekingalpha.com/article/273362-wall-street-s-half-re...

    http://seekingalpha.com/article/278976-wall-street-s-half-re...

    "Is Wall Street Manipulating Solar Stocks"

    http://seekingalpha.com/instablog/872074-clearwave-capital/1...

  • Report this Comment On July 12, 2011, at 1:56 PM, TMFFlushDraw wrote:

    Read the first negative and then check out TSL's news and price action today.

    Scary...

    Travis Hoium

Add your comment.

DocumentId: 1516989, ~/Articles/ArticleHandler.aspx, 8/1/2014 7:38:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement